§ Order for Second Reading read.
§ 3.35 p.m.
§ The Chief Secretary to the Treasury (Mr. John Diamond)
I beg to move, That the Bill be now read a Second time.
This Bill deals with the accounting arrangements for Government borrowing and lending. It might be convenient if first, I deal very shortly with the history of the matter and then explain what the main proposals are, and then explain what matters are not affected because the House, I think, is of the opinion that some matters are altered which are not altered. I can then perhaps deal, finally, with those matters which are altered and hope then that the Bill would receive, in due course, a Second Reading.
To deal with the history of the matter. It is known that all Governments are God-fearing; but however God-fearing they are they find it increasingly necessary to be both borrowers and lenders. As the years have gone by this has grown, certainly in this country, to such an extent that the legislation which was introduced, mostly in the last century, to make provision for these matters is no longer relevant.
The borrowing and lending is large in volume and extent. The number of bodies concerned is much greater and as a result of being tied to the legislation of the last century, the accounts produced and the figures and explanations put before this House are inadequate in the sense that they lack clarity and, in certain cases, are almost misleading. It is necessary for every hon. and right hon. Member, when the Budget and accounts are published, to do his own sums to find out what has been happening, because the accounts in their statutory form do not give adequate information. The famous "line" is no longer a very relevant consideration and, therefore, my right hon. Friend the then Chancellor, in his Budget speech in April this year, announced that there would be a review. He made it clear that he would review not only the form of the matter, but the substance as well.
38 Perhaps I could give an indication of the matters which were reviewed. The House is, naturally, entitled to know what matters of substance were reviewed and if they are not in the Bill why they have been excluded. It is clear that when one is thinking of the Government's position as borrower and lender, particularly in relation to nationalised industries and local authorities, there are three possible positions that could be adopted. The borrowing could be done by the organisation itself or one could have a separate, "in-between" agency to do the borrowing or the lending. Another alternative is that the Government could do it, as they largely do at present.
The first possibility, that of reverting to the system whereby nationalised industries particularly raised their capital on the market by issuing securities which were guaranteed by the Government, was examined during the review. The House will remember that this was abandoned for very good reasons in 1956. Those reasons are explained in the Report of the Radcliffe Committee with admirable clarity and, it was decided, they are still valid. They related mainly to the difficulties of managing the market when there were a number of comparatively small issues, as would be represented here, continually coming before the public.
It was decided that that alternative was still not a good idea. We considered the second possibility, of setting up a separate agency, which would deal with the lending of nationalised industries, local authorities and others which would undertake the necessary borrowing. After consideration we reached the conclusion that such an agency would convey no facilities and no advantages which the Treasury did not already possess and that there was no point in inserting an intermediate body. We are left, therefore, with the Government doing their own borrowing but with the decision to bring the accounting arrangements up to date. The Bill is intended to carry out that conclusion.
That is the history of the matter. I turn now to the main proposals in the Bill. The major proposal is that which is clearly set out in the Explanatory and Financial Memorandum and consists of separating out the borrowing and lending transactions of the Government 39 from their normal receipts and payments on revenue account. The broad intention is to bringing within the new National Loans Fund, which is to be set up, the transactions in which the Government act as a borrower and the transactions in which the Government act as a lender of unsubsidised loans. It is necessary to limit it in that sense. Accordingly, the Consolidated Fund will continue to accommodate receipts from taxation and ordinary expenditure out of moneys voted by Parliament.
I think that I ought at this point to remove a possible confusion relating to the word "Exchequer". I do not propose to refer to that term any more: In the past it has been the custom to refer to payments into the Exchequer and to refer to payments out of the Consolidated Fund. To begin with, as a new Member I often wondered how this was possible. I imagined the Exchequer accumulating and growing fat and a curious fund, like a magician's hat, out of which we could continually take things without anything ever going into it.
§ Mr. Diamond
The hon. Gentleman is perceptive, as usual.
Many people still think so, but it is not the case, because as he and I discovered a long time ago, these two are one and the same thing. The confusion arises through having two different names. Anything that we can do to remove confusion is helpful. Therefore, I propose in future to refer to the Consolidated Fund as such and to the new National Loans Fund as such.
This does not mean that my right hon. Friend the Chancellor of the Exchequer, whom I am glad to see in his place, is no longer to be described in his traditional way. It is not my intention to refer to him as "the Chancellor of the Consolidated Fund and the National Loans Fund". We must in his case regard the Exchequer as an all-embracing title.
There will, as I have indicated, therefore be two separate accounts—the National Loans Fund and the Consolidated Fund. The deficit of the Consolidated Fund will be transferred to the 40 National Loans Fund, or, if it is a surplus, as is normally the case, will be so transferred. The "line" as we now know it will disappear and the published accounts will, I think, show what people want to know, as far as that is consistent with preparing our accounts on a cash basis.
I regret, however much we look at it, that we are driven to the conclusion that the Government are compelled to prepare the accounts on a cash basis, if only for the purpose of presenting information rapidly to the House, because cash accounts are presented immediately; they are there available every day, whereas accounts prepared on an income and expenditure basis take a very long time indeed. If only for that reason, it is necessary to continue on a cash basis. I repeat that the accounts that are published will in future, after the Bill becomes law, enable the House to understand the situation with much greater clarity and intelligibility.
The statements that are presented at Budget time immediately, so that the House can make its decisions, will continue to be prepared on a cash basis. I know that the hon. Member for Worthing (Mr. Higgins) is very anxious that they should be prepared as far as possible on an income basis. I can only repeat that this would mean such a delay as would make it impossible to give accurate figures. One can always give approximate figures. It would make it impossible to give accurate figures at the time of the Budget. Although, therefore, the balance which will be shown will not be precisely the same as would be ultimately shown on accounts prepared in the way he and I would both like, nevetheless they will be much nearer to that figure than is the case at present.
There are several advantages to be claimed from revising and modernising the arrangements in this way. I have described them as clarity and intelligibility, and, I would add, the removal of misconceptions. A foreigner, for example, reading our Budget statements would not realise that he would have to make allowance for the amount of nationalised industry in his own country before being able to read the figures intelligibly. If, for example, in his country fewer industries were nationalised than in this country, he would realise only after the 41 matter had been brought to his attention that here we are providing through this statement for the loans to be provided for all the nationalised industry of this country, whereas in his own country those industries, perhaps still being un-nationalised, would get their funds in the market in the ordinary way and the figures would not enter into the budget at all. It is, therefore, helpful for those who wish to read a pure budget statement, a statement of the Consolidated Fund, that the arrangements we propose should be carried out.
I have said that there are several matters which the House might think would be affected by our proposals. I think that it would be helpful if I go through the major ones and explain those which are not affected by what we propose to do. First, security for loans is not affected one iota. Security for loans will, in the first place, be that of a charge on the National Loans Fund, both as regards existing loans which are transferred there and new loans, but there will be recourse to the Consolidated Fund. Therefore, the security of both Funds will be there in support of loans issued both as regards existing and future loans. I therefore think that I am entitled to assert that the security position is completely unaltered.
The next matter which is not affected is borrowing by nationalised industries from the Government. Those arrangements will remain unaltered. So, too, will borrowing by local authorities from the P.W.L.B. Those arrangements again remain unaltered by the Bill. The Local Loans Fund is being wound up by the Bill, but that Fund is in any event a dead letter and does not affect the issue. I repeat that both the nationalised industries' borrowing and local authorities' borrowing from the P.W.L.B. are not affected by the Bill. Nor is the borrowing by local authorities from the market on their own credit. Those arrangements will go on exactly as before and are not affected by any provisions of the Bill.
The rates of Government lending, whether to nationalised industries or to the P.W.L.B., are not affected, although the description given and the definition of the powers of the Government in lending are more precise and clear. The Bill makes it clear that all loans to national- 42 iced industries and to the P.W.L.B. must be hard loans—I think that is the term which most of us understand—not soft loans. They must be on terms on which the Government themselves could at that time borrow for loans of that duration and they must include a sufficient margin— a very small margin indeed—to cover the cost of issues. The way we do that normally is to raise the rate to the next⅛ per cent. We level it up to the next⅛per cent. That is a very small matter. The loans which will be made will be at the rates prevailing for Government borrowing at that time for loans of that duration.
Those are the major matters which are not affected by the Bill.
Certain matters are altered. One of them, although it is more a matter of form than of substance, is the authority for the limits of borrowing from the P.W.L.B. For the last two or three years the range of local authority borrowing has been at the rate of something approaching, or even in excess of, £600 million a year. That has meant that we have had to have a new P.W.L.B. Act every year.
It is proper, of course—indeed, essential—that the House should debate fully loans of this magniture, but the proposal which the Bill contains should serve that purpose very fully indeed. The proposal in the Bill is that Parliament should fix an initial limit of £1,000 million in the Bill itself and that power should be given to the Treasury to increase that three times by not more than £1,000 million each time.
Each such extention will be the subject of a Statutory Instrument which will be debated on an affirmative Resolution and the House, therefore, will have the same facility for debating this matter as normally takes place on the Second Reading of the Bill to increase the facilities of the P.W.L.B. I say "the Second Reading" because the practice has been that although these matters have been discussed fairly fully on Second Reading, the Committee stage has generally been absolutely formal. Therefore, I believe I am accurate in saying that we are not proposing under this system to withdraw from the House any of its powers for the proper examination of the additional amounts of these loans.
43 The second matter which is altered, and again is a matter of form rather than of substance, is the matter of dealing with the profits of the Issue Department. As the House is aware, the Bank of England holds Government securities as backing for notes issued. It has been the practice since 1939, I believe, for the surplus, which is described in the Statute as the profits—that is to say, the income from the Government securities, less the cost of issue—to be transferred to the Exchequer Equalisation Account. But, in fact, that is a comparatively new thing. As I say, it was introduced in 1939 and the Bill proposes a reversion to the system which, in effect, applied before that. It will obviously be recognised that the interest on these Government securities, in fact, comes from what will now be the National Loans Fund, and it is only sensible, therefore, that the profits of this Department should go back to that Fund. That is what the Bill proposes.
There is a further alteration which is a little more a matter of substance, and that is in connection with overseas lending and subscriptions to certain international organisations. The proposal in the Bill is that these, to the extent that they are paid out of the Consolidated Fund at the moment, should be transferred from the Consolidated Fund to votes. If I may remind the House, the position at the moment is that a good deal of the overseas aid programme comes on votes, but not the whole of it. Part of it comes out of the Consolidated Fund, being lending.
This lending would, under the proposals in the Bill, unless we made any other suggestion, go to the new National Loans Fund but, as I have already indicated, it is essential that that Fund, if it is to deal truly with the position of the Government as an intermediary in borrowing and lending, should not contain any subsidy element. Therefore, the loan should not be soft to any extent. Any subsidy element is, in fact, a contribution, an expense which the Government incur if they lend at less than they borrow. It is essential that the House should appreciate this and that the figures should reflect it every year.
Accordingly, it would not be right that loans made to an organisation, which are 44 partly hard and partly soft as in the case of overseas lending where aid is concerned, should be paid out of the National Loans Fund. They will, therefore, be paid on votes. This will have the added and major advantage that the House will be able to see at one glance the extent of the overseas aid programme which is at the moment divided between the Consolidated Fund and the votes.
§ Mr. F. J. Bellenger (Bassetlaw)
My right hon. Friend will know from his professional experience that loans are only one part of the balance sheet. Therefore, foreign investors in particular—some might even say speculators—at times will want to see the relationship between loans and assets so far as nationalised industries are concerned. In the case of the Colonial Development Corporation, investors can see how we are doing in lending money to certain undertakings overseas.
I am wondering whether my right hon. Friend has any proposals relating to nationalised undertakings which, at the same time as providing information for the House and others about the amount of the loans, can also provide in the form of a balance sheet the probable valuation of the assets?
§ Mr. Diamond
I take my right hon. Friend's point fully. The new National Loans Fund will show loans which, so far as one can tell, are good loans and. therefore, worth their face value. There will, of course, be what is normally described as the dead weight of the national debt, but the interest on that will be serviced by the Consolidated Fund and transferred to the National Loans Fund. It is the intention, as I have made clear, that the loans made by the National Loans Fund should be hard loans, and indeed, as I should have added, in the case of local loans we are winding up the Local Loans Fund but the bad debts on that Fund are not being transferred, so as to avoid the very predicament to which my right hon. Friend has referred. As I say, they should be good loans, hard assets.
Whether for all time one can control the situation is beyond anybody's capacity to say. If one wants to look at the whole story, just as much as with the C.D.C. one looks at the bodies which receive assistance from the C.D.C., so in this case if one wants a consolidated 45 view one would have to look at the balance sheets of the nationalised industries themselves and see the loans which they borrowed in this way and which are shown as loans in the National Loans Fund, to see the assets which represent those loans in the balance sheets of the nationalised industries. I am grateful to my right hon. Friend for his intervention because it show that he follows clearly the point that I am making about the alterations provided by the Bill.
There is only one further alteration to which I need refer and that relates to the Treasury's borrowing powers. Here again, it is a matter more of form than of substance, but it is perhaps important form. The Treasury's borrowing powers are re-defined in the following way. All the receipts which are to go into the National Loans Fund are defined in the Bill. So it is Parliament which is saying which receipt shall go into this Fund. All the issues out of this Fund will be defined by statute in every case. It is Parliament which is saying both what is to go into the Fund and what is to go out of the Fund. Clearly, if Parliament says that more is to go out of the Fund than is to go into it, the Treasury must be able to borrow the difference. Because Parliament controls utterly and wholly the payments into and out of the Fund, it thereby controls the Treasury borrowing powers.
But it does not have to refer to them on each occasion. The Bill will give power to the Treasury to borrow the excess, but that Treasury borrowing is absolutely controlled by Parliament. An excess is the difference between two items. If one controls each of the two items, one automatically controls the difference between them.
I hope that I have explained the main purposes of the Bill. It could have dealt with matters of substance, but it has not done so very much for the reasons which I have explained. The present arrangements are good arrangements, but the present accounting procedures are outmoded and outdated and do not give the House the information to which it is entitled. The Bill should improve matters considerably, and I hope, therefore, that it will receive a Second Reading.
§ 4.1 p.m.
§ Mr. Terence Higgins (Worthing)
The House is grateful to the Chief Secretary 46 for his clear exposition of the general principles underlying the Bill. I assume from his concluding remarks that the normal privileges which the House enjoys of raising constituency matters on the Consolidated Fund will be in no way impaired under the changes now proposed. Indeed, in the debate on the Motion and Money Resolution governing this Bill we received an assurance from the Financial Secretary to the Treasury that this would be so. I assume that I am right in thinking, also, that the exact timetable will in no way be altered by our having on future occasions, if the Bill is passed, a National Loans Fund as well as a Consolidated Fund.
It is fair to say that the right hon. Gentleman's approach has been an accountant's approach, and I well understand that he may expect me to raise matters concerning the economic variables rather than just the accounting concepts. The effect of the Bill is not only to alter some of the institutional set-up in the relationship between the central Government and the nationalised industries, local authorities, the I.M.F., and so on, but also to alter the actual form of the accounts presented to the House, in particular, those presented immediately before the Budget.
I take a slightly less optimistic view of the Government's proposed changes than does the Chief Secretary, and I notice, also, that the Economist, in an article on 4th November last, was a little less optimistic than the right hon. Gentleman. It said:The Treasury is going to introduce a National Loans Fund Bill. Its object will apparently be to ensure that Britain's Budget estimates and exchequer accounts—which are presented in a highly misleading form at present—can be presented in a newly misleading form in future.It is right that the House should give close attention to this matter. We have to consider both the institutional framework and the accounting system which the House employs. The right hon. Gentleman has dealt largely with the Clauses of the Bill, and to some extent he dealt with them chronologically. I shall divide the debate at this stage conceptually rather than chronologically between the institutional relationship of the central Government, the nationalised industries, local authorities and so on and the 47 accounts themselves. I think that this would be helpful.
My hon. Friend the Member for Horsham (Mr. Hordern), who apologises for not being able to be here at the beginning of the debate, but who hopes to catch the eye of the Chair at a later stage, will concentrate on the local authority side of the question. I shall concentrate, so far as I am able, on the broad context of economic management which the accounts covered under the Bill and under the Consolidated Fund Bill raise for the House itself.
The question of reforming the accounts has a long history. There was a notable White Paper on the subject back in 1963, and in his Budget speech last April the then Chancellor, now the Home Secretary, first unveiled his intentions on the matter. In the debate on the Motion governing the Bill, I quoted what he then said. The right hon. Gentleman went further in the debate on the Gracious Speech and said again that he expected to introduce the Bill. We had our debate on the Money Resolution—I shall return to those briefly in a moment—and now the Bill is before us on Second Reading.
Plainly, the Bill is very much the brain-child of the right hon. Gentleman who is now Home Secretary. It embodies both his virtues and, to some extent, his vices. It represents an endeavour to adopt a commonsense approach and to simplify our accounting procedures while, at the same time, embodying a preoccupation with accounting magnitudes and a tendency to look at the moment rather than to look forward.
I put an appeal to the Treasury at the outset. The Bill is intended to alter the form of accounts which will be presented when we debate the Budget next April. All agree that that Budget will be of crucial importance to the country as a whole, and it would be most unfortunate if the exact purport of the accounts then presented was not immediately clear. I hope, therefore, that, before we reach the Committee stage on this Bill, the Government will place in the Library, perhaps, a pro forma account showing the form in which the accounts will be presented next April.
The Bill does not indicate this clearly. There is no indication of what actual changes in format there will be. There- 48 fore, if the right hon. Gentleman would put in the Library, or publicise in some other way, the form which the accounts will take when next presented, perhaps using the figures for last year or the year before, the House would have a useful opportunity to familiarise itself with the Government's proposals, and, moreover, we should be enabled to propose such Amendments in Committee as we thought might improve the general approach.
This is not a party political matter, but it is a matter of great importance to the economic management of the country. I do not imagine that my right hon. and hon. Friends—I certainly do not—intend to vote against the Bill today. Nevertheless, we intend to scrutinise it most carefully in Committee.
In many ways, the Bill ties up with the debates we have had on previous occasions, particularly on the economic regulator and the question whether the Government should publish their economic forecasts. It ties up, also—I notice that one or two hon. Members opposite have left the Chamber at the moment, but, no doubt, will return later —with the question of the Letter of Intent which the Government sent to the International Monetary Fund and which we debated last week. That document includes a number of figures which, presumably, will be embodied in the accounts to be prepared under the Bill now before us.
I turn now to the institutional changes to be brought about by the Bill. The real difference which it is proposed to make from the former situation under the Consolidated Fund is that the Consolidated Fund will have hived off from it a National Loans Fund so that the Consolidated Fund will include all the receipts from taxation and the expenditure from that Fund on both current account and capital account. Second, we shall have a National Loans Fund which will have as its source of funds the Government's borrowing, and then, again, the expenditure from that National Loans Fund will include both current account and capital account.
I think that it will be agreed that there is a case for including all the Government's borrowing under one umbrella. On the other hand, it appears from the Bill that that umbrella will leave one or two people out in the wet, so to speak. In 49 particular, for reasons which remain obscure, lending to the National Film Finance Corporation and Votes under the Military Aircraft (Loans) Act, 1966, are not to be included in this Fund. Perhaps the Government should later indicate why those two items have been excluded.
We were also rather surprised to discover in the Standing Committee which was considering the Trustee Savings Banks Bill last week that the amounts to be advanced to the trustee savings banks for capital expenditure were not to be included in this Bill. So that the House may be aware of how comprehensive the Bill is or is not, I hope that we may have a complete list from the Financial Secretary, rather than a partial one, telling us exactly what borrowing is to be financed by the Government but is not to be included in this Bill, because it is not entirely clear at the moment.
I assume from what the Chief Secretary said that certain nationalised industries, such as British European Airways, will still be required to introduce into the House the kind of borrowing Order which we debated last week. I assume that the accounts will be amalgamated into the National Loans Fund accounts, but that the actual control will be debated stage by stage as before, and that there is no change in the institutional set up.
Next, there is the question of timing of expenditure, which, I think the Chief Secretary will agree, is very important. Two questions arise here, stemming in a way from the debate of 29th November on the Ways and Means Resolution. I questioned what rate of interest would be charged to the various people borrowing from the Government and there seems to be a slight inconsistency in the statement which the Financial Secretary made, as reported in column 550 of the OFFICIAL REPORT of 29th November. He seemed to say that the rate of interest which they would be charged was that at which the Government could borrow at any given date; that if the Government could borrow at a low rate that would be nice for the people who would get the money in the end, but that if it was a high rate that was bad luck. But following my intervention he seemed to say that it was the rate which prevailed at the moment when the borrowers borrowed. The two statements can be reconciled only if the two events take place simultaneously. 50 We are still not entirely clear after the Chief Secretary's speech this afternoon which rate prevails—the rate when the money comes into the Fund or the rate at the moment when the borrower obtains the money from it.
§ Mr. Diamond
I am sorry if I did not make it clear, for I wanted to make it very clear indeed. Whether that is an accurate record of my hon. Friend's speech I do not know; I was not here at the time. But I want to make it clear that his second reference clarifies the situation completely, and that what I said is absolutely correct, namely, that the terms of the loan must be such that if the Government were borrowing that day—that morning, even—they could borrow on those terms for such a period.
§ Mr. Higgins
I am most grateful for the right hon. Gentleman's intervention. I am glad to see that he is finally converted, as all progressive accountants are, to the idea of replacement costs rather than historic costs. I was worried about the exact purport of what was said in the debate on 29th November. From an economic point of view, as from an accounting point of view, it is desirable that the going rate should be charged, rather than a historic rate which no longer prevails.
I want to raise two other questions which, in some ways, stem from the point with which I have just dealt. Will any attempt be made to ascertain how much of the outflow from the Consolidated Fund will be on current account and how much will be expended by the people borrowing the money on capital account? We shall no doubt debate today the vexed question of the line, and whether things are above or below it. It has been pointed out many times that this is a vague distinction, depending on whether there are specific or general powers to borrow, and having nothing to do with whether it is a matter of current or capital expenditure.
But from the point of view of economic management we need to ask the Government whether the accounts will show whether the sums borrowed from the Fund are for capital account or current account, and what the likely effect of timing of expenditure on the aggregate demand of the economy will be. Unless I have misunderstood the 51 exact form of the Bill, which is fairly complicated, that question will be left in obscurity even after the reforms which the Government propose to introduce.
I want to turn now to the broader question of the way in which the accounts are presented to the House. We are agreed that the line has tended to fade into oblivion, although conceptually I think that its residue remains in the present form of accounts, rather like the grin of a Cheshire cat after the cat has disappeared. But the Bill will finally remove even the grin from the face of the Cheshire cat, and we shall lose the above-and-below-the line distinction completely if it becomes an Act.
But we face the problem that the Government are not tackling the matter as comprehensively as some of us feel it needs to be tackled. We appreciate the accounting difficulties. The right hon. Gentleman says that it is necessary to put the figures on a cash basis, but it is not true at present that they are fully on a cash basis, because they include estimates for future expenditure, which implicitly assumes something about the level of money income next year. Therefore, there are some attempts to forecast in the present accounts. The Government should be a bit more ambitious than they have been up to now and cover this point. They have begun to do so even in the accounts which the House now considers.
It is relevant to ask what the present accounts are used for. They are, presumably, used for the House to appraise what is happening to the management of the public sector and the economy as a whole. Presumably, the Government and Parliament are intended to use them, and perhaps even overseas bankers and others may try to employ them as well. The right hon. Gentleman says that we need to do our own arithmetic now and reach our own conclusions. The fact is that it is very difficult, however well or hard one works at one's own arithmetic, to reach a precise conclusion of the economic significance of the accounts when they are presented on Budget day. I shall return to that matter in a moment.
It will be a great deal easier for us to debate if the Government agree to present us with the format of the accounts 52 to which I referred earlier. I make one specific appeal on the point, which is vital in the present economic situation. It is no good presenting that sort of format unless one includes forward estimates as well. I suspect that the Government have in mind a format which will perhaps eliminate the forward estimates from the National Loan Fund accounts. They would, presumably, still include them for the Consolidated Fund. I hope that they will do as they did before, when we had the whole thing in one Fund, and include a forward estimate in the future figures. It would be grossly irresponsible of the Government not to provide that sort of format before we debate the figures in Committee before the House has had an opportunity to familiarise themselves with them.
I now come to the final point which I think needs to be made initially in the debate, which is that the Government have been singularly reluctant to make any forward forecasts. We have debated this matter many times. The accounts we now get under the present financial statement are the only real forward estimates which the Government make. The then Chancellor of the Exchequer refused last year to reveal all the variables which were the basis of his underlying forecast, and, in particular, he refused to reveal the relationship between money incomes, disposable incomes, consumption, and gross national product, which itself determines money incomes.
Therefore, there are many implicit assumptions behind the financial statement that we now get and the estimates in the financial statement for the future year which are never revealed to the House. This has been emphasised very strongly in successive articles by the Economist, which has been leading something of a crusade in asking the Government to "come clean" about their forward thinking.
Also, we ought to be clear that the accounts are presented in money rather than constant price terms. This implies changes in money incomes, which, again, have not been made explicit in the statement laid before the House. The Chief Secretary is not right in saying that all the figures which have been presented have been on a cash basis. Many have been on a forecast basis, implying other changes. There is a very strong case for 53 detailing this in future accounts about the borrowing requirements of the Government.
It is this borrowing requirement that reeds to be spelt out in more detail than was done by the Financial Secretary in the debate on the Ways and Means Resolution last week. If we are to ascertain what the aggregate demand in the economy is, we must have it broken down into consumption, investment and Government expenditure and, in turn, Government expenditure must be broken dawn into consumption and investment. I hope that we shall get a better breakdown under the Bill to show how much is current expenditure and how much is capital investment because this is very important.
There is something else which is not spelt out at the moment. I am uncertain whether it will be spelt out in the Bill, but I hope it will be spelt out in future, and that is the relationship between saving and investment. The crucial change in the analysis of our economic affairs was brought about when it was realised that, while it was always true that saving equalled investment after the event or ex-post, whether saving and investment were balanced or not balanced before the event and what the intentions were about this made a crucial difference to the state of the economy.
If savings exceeded investment it would tend to have a deflationary effect. If investment intentions exceeded savings intentions it would have an inflationary effect. But should we be able to estimate from the Government sector the position of saving and investment under the Bill once we have set up the National Loans Fund? This is a point that we should consider very carefully. If the answer is, "No", is it not possible to reform the accounts in some way so that we can determine this?
Finally, we come to the question whether there is a Budget surplus or deficit. In his remarks on 29th November, the Financial Secretary was rather too optimistic over this question. He suggested that at the end of the year we should come to a position where either the National Loans Fund owed something to the Consolidated Fund, or vice versa, and one could easily establish whether the Government had run a sur- 54 plus or a deficit by working out exactly what the relationship between the two was and whether the Government had borrowed more than they had received in taxation or less.
The question whether the Government are running a surplus or a deficit is crucial to the management of the economy. Clearly, if the Government run a deficit they will have to create assets which will go into the banking system, there will he a credit multiplier effect thus increasing the effective amount of money, and it will have inflationary effects. If they call in assets it will reduce the banks' liquidity position, there will be a multiplier and a reduction in the amount of money in the economy, and it will have a deflationary effect.
But we, as the House of Commons, need to know whether the Government are running a surplus or a deficit. Unless I am very much mistaken it will riot be possible for us to do it at the moment, and it will still not be possible for us to ascertain the real magnitude of this very important concept at budget time even if the idea of the National Loans Fund Bill has been accepted. It is crucial that we should do so. I am not sure that we should not put into the National Loans Fund Account and the Consolidated Fund Account some indication of what a neutral monetary policy would involve. One of the paradoxes of the present system of accounts and the proposed system of accounts is that sometimes what seems to be an inflationary deficit is not on balance inflationary and sometimes what seems to be a deflationary surplus has the opposite effect. In short, the accounts are very misleading. I am not sure that we should not have a datum line, which is what the Government estimate a neutral monetary policy would involve for borrowing.
But the actual borrowing requirement from the National Loans Fund is a very odd concept and does not indicate whether the Government are running an inflationary deficit or a deflationary surplus. This is not a mere academic matter. The concept itself has been very much embodied in the Letter of Intent to the International Monetary Fund, which we debated at considerable length last week. The danger of this is that we get tied up with the idea that what used to be called "the deficit" and is now called 55 "the borrowing requirement" is something which is meaningful. The Economist says:the advantage of the new system will be that the meaningless figure which used to be called the British Treasury's overall budget deficit, and is now called its overall budget borrowing requirement, will henceforth not be called anything at all, so that the size of it will no longer scare foreigners out of their wits.This was written before the Letter of Intent.
We find in the Letter of Intent that the Government are undertaking to keep down the borrowing requirement to £100 billion. This in itself is a little misleading, because the £ sign would, presumably, imply that the billion would be an English billion rather than an American or a French billion, whereas apparently one would use the billion in that sense only if there was a dollar sign.
§ The Financial Secretary to the Treasury (Mr. Harold Lever)
The hon. Gentleman suggested that we had agreed to keep the borrowing down to £100 billion. I should have thought that any Government would have found that a relatively effortless task.
§ Mr. Higgins
I take the hon. Gentleman's point. I was trying to make the point that the use of the expression "billion" anyway, when preceded by the £ sign, is somewhat misleading. Perhaps we ought to agree later precisely what the significance of the amount means.
The relevant paragraph of the Letter of Intent reads:Fiscal policy will continue to play the most important role in making room for the needed improvement in the balance of payments. It is the Government's intention to ensure that the Exchequer's borrowing requirement for the financial year beginning 1st April, 1968, is kept under firm control. So far as can be seen at present, this entails holding down the borrowing requirement to not more than £1 billion"—Yes, not £100 billion——the appropriateness of which estimate and the measures necessary to ensure that it is achieved will be reviewed with the Managing Director in accordance with the timetable specified in paragraph 9.If I understand this correctly, it means that a figure somewhat less than a billion will appear in the Government's accounts to be introduced under the Bill. Indeed, if what the right hon. Gentleman said the 56 other day is correct, the actual amount necessarily allocated between the Consolidated Fund and this Bill will be less than £1 billion.
The crux of the matter is that the figure to appear in the accounts will still be very meaningless if what we want to ascertain is what changes in the monetary supply or what the inflationary or deflationary effects of Government policy are likely to be. It depends on which items are included in the National Loans Fund. If the Government were suddenly to denationalise steel and borrow for the operation by going on to the market, the item would be very dramatic indeed, for example.
I am somewhat mystified as to why the former Chancellor should have felt that this specific figure had any economic significance at all in his Letter of Intent and why it is that apparently we are to perpetuate accounts which continue to be similarly somewhat meaningless figures.
The second point is implicit in paragraph 11 of the Letter of Intent, which uses the expression that…the growth of the money supply will be less in 1968 than the present estimate for 1967, both absolutely and as a proportion of G.N.P., despite the expected substantial recovery of reserves. It continues to be the Government's policy to meet its own needs for finance as far as possible by the sale of debt to the non-bank public and interest rate policy will be used to this end.The actual borrowing requirements, on the definition of the Chief Secretary, will depend very much on how far the Fund we are discussing is able to raise the money from non-bank sources. This is a very odd dividing line. In the relevant Clauses, such diverse things as Treasury bills and National Savings Certificates are included in the same package. There is a difference between whether the matter is being financed out of savings coming from the non-bank public or out of the issue of Treasury bills, which has an impact on monetary supply.
What we are arguing is that the revision in the accounts which the Government propose in the Bill will still make the position far from easy and will perpetuate present difficulties in estimating the real Budget deficit or surplus and making them meaningful in economic terms. I am not sure that we should not consider how to improve this matter so that we can have presented to the 57 House of Commons a series of accounts which, on Budget day and at subsequent stages through the year, would enable us to improve our economic management. The Bill goes some way along that road. It does improve the situation, but we are not satisfied that we could not go a great deal further, provided that the Government are prepared to make their expectations appreciably clearer than at present.
§ 4.33 p.m.
§ Mr. R. B. Cant (Stoke-on-Trent, Central)
I expected that such a large number of Members would want to speak on this exciting subject that I decided to limit my contribution to two points. I agree with my right hon. Friend the Chief Secretary to the Treasury and also with comments made by the hon. Member for Worthing (Mr. Higgins). I want to put two points, both of which are within the limits of my competence, not being an accountant or lawyer but a hack economist. They are, first, the setting up of the National Loans Fund within the context of the national incomes accounts and, secondly, and more important, local government finance.
I have a little, although somewhat sentimental, attachment to the terminology "above-the-line" and "below-the-line". Perhaps this is merely a reflection of my age. Perhaps those of us who have talked about above and below the line for many years feel that it should not be cast aside so lightly. But I wonder whether this is really a very radical Bill or just another expression of our rather pragmatic philosophy on this side of the House. We have moved from Gladstone to above and below the line, to 1965 and the Consolidated Fund and the overall borrowing requirement, and now we have reached the dizzy heights of the National Loans Fund. My point is the same as that made by the hon. Member for Worthing—that in this modern age this is not enough.
I do not want to go over many of the points made by the hon. Gentleman. I suggest to my right hon. Friend that he has a look, however, at the American approach to Budget presentations. Although we are told by the professors that we not draw too many conclusions or seek too many parallels between our position and that of the United States, nevertheless the Americans' four different presentations—the cash basis, the administrative basis, the national income 58 account budget and the high employment budget—really give a much more significant interpretation of Government expenditure in the context of the national economy. Although the Bill is a useful interim clearing up operation, we could go a good deal further.
Perhaps I can add a little addendum to this part of my speech and ask my right hon. Friend whether he has considered a public relations exercise in association with this clearing up of the presentation of the national account. I remember reading somewhere a comment by one of the professors associated with the Institute of Economic Affairs, Hobart House. He said, in effect, "If we ask how we can find out what happens in the Budget and how the intelligent man in (lie street can get as full appreciation of the really significant thing about Government revenue, expenditure, and so on, at the Stationery Office, we will be handed an information pamphlet called, ' The British System of Taxation '. If you are obviously an earnest seeker after truth you might be told that all the information is contained in the Financial Statement"
That professor had something rather rude to say about the Financial Statement. He said.…Financial statement, with its funereal looking title page, unexplained tables of revenue and expenditure, cryptic explanations of tax changes and occasional intriguing but incomprehensible details of such recondite matters as the E.F.T.A. rate on snuff imports containing not more than 13 per cent. moisture.Since that was written, we have had a significant additional table included in the Financial Statement, but the point is made, especially if we search HANSARD and the Finance Acts. I ask my right hon. Friend to bear this point in mind, because if, once more, we look to the American example, we find that they bring out a 70 to 80 page handout which is full of small print and heavy type and graphs and charts. It is an attempt to give the man in the street some idea of what is contained in the budget, the Government's financial accounts, which, after all, plays a significant part in his life. Not only is this done in Sweden and the Netherlands, but there is a translation into English, perhaps in the hope that the Chief Secretary will read it, and even that home of financial obscurantism. 59 France, publishes a very similar intelligent man's guide to the Budget accounts.
I wanted mainly to deal with local government finance. Here we have a leg of British Government which, last year, was responsible for spending about £4,500 million, whose expenditure has increased 70 per cent. since 1961, whose borrowing since 1961 has increased 110 per cent. and whose expenditure is 7 per cent. of the gross national product. If hon. Members opposite are horrified by the overall growth of public expenditure, they must be even more so by the growth of local government expenditure, which has been considerably faster.
I have a great deal of sympathy with those who argue that local government finance, particularly capital finance, is on a totally unsatisfactory basis and I say that partly as a consequence of reading books on the subject, but also partly because of having been a member of a city finance committee for some 15 years. From 1946, when local authorities were restricted to access to the Public Works Loan Board, on to 1953, when they were allowed some access to the stock markets, and then on to the critical date in 1956, when local authorities were virtually thrown out of the Budget, we have a history which is such that the city treasurer or the county treasurer brought up on gilt-edged stocks must have felt that the world was almost coming to an end. I have a great deal of sympathy for such people.
But since then there have been further changes. In 1963, it was decided that the amount of money contributed by the P.W.L.B. to capital expenditure—and I emphasise that it is long-term capital expenditure—should grow from 20 per cent. to 50 per cent. by 1968. This arose because of concern with the growth of temporary debt, but, such were the demands of local authorities on the Exchequer that the arrangement has had to be terminated.
When the Institute of Municipal Treasurers and Accountants, for example, says in its most recently monthly publication that it is asking the Government to make changes which are urgently needed not only to meet the need to reshape the budgetary presentation of accounts, but to place the finances of local authority capi- 60 tal expenditure on a rational and stable basis, the Government ought to listen to professionals of this kind. I do not think that the Bill as we now have it meets all the points which they put forward.
The main point, with which one must have considerable sympathy, is that as the agent placing on local authorities the obligations to perform certain tasks, the Government should accept responsibility for providing them with substantially more than 50 per cent. of all and not only the long-term capital required by them. I would not know what "substantial" means, whether "substantially more than 50 per cent." is 70 per cent.
The reasons for this can be briefly stated in this way. Anybody who has had any experience of local authority work must appreciate that planning is an impossibility. On 5th January, I shall be attending a meeting as a member of the Financial Planning Committee of Stoke-on-Trent Corporation. We shall have before us a very large number of projects and, obviously, if we are realists, we will cut down that number substantially. However, the point is that even when a project gets approval there will be no guarantee that the borrowing and financial facilities will be available. There is an air of unreality about local government financial planning.
Local authority finance is almost completely chaotic—not that anybody is about to go bankrupt, or that expenditure is exceeding income, but only in the sense of the sources from which the funds for local authority capital expenditure are derived. The Bank of England Quarterly Review shows that during 1965-66 the amounts coming from the Public Works Loan Board was about half the total and the non-P.W.L.B. amount is quite frightening. The same article attempts to make an analysis of how much of this temporary money is derived from overseas sources and the figure given is about £500 million. We must ask ourselves whether it is satisfactory that the Government should permit a situation in which so much long-term local government expenditure is financed by short-term loans from the Euro-currency markets in London.
I do not want to ride my particular hobby horse again, but although throwing local authorities on the money market 61 may have vastly improved the financial education of City treasurers and produced a race of financial innovators hardly paralleled elsewhere in the country, an element of volatility has been introduced into local government finance which no Government should permit.
§ Mr. John Nott (St. Ives)
Would not the hon. Gentleman agree that three-quarters of the confusion in local authority capital borrowing arises from the fact that there are about 1,500 rural and urban district councils and more than 100 county and county borough councils and that the majority of the present confusion would cease if local government structure were reformed? I should like his comments on that, because I think that this is not so much a financial as a local government structure matter.
§ Mr. Cant
I cannot agree with that, although I have a great deal of sympathy with it. I hope that the reform of local government will produce many fewer local authorities, whether it is nine or 10 large regions or 30 or 40 city regions remains to be seen. That would make a contribution, but, even so, the larger groupings would find their way into this market where the short-term funds are available, often at great expense. This raises other questions which I will not go into.
If I believed so strongly that the Government should accept responsibility for providing a higher proportion of all capital expenditure than they do, and if I accept the implication of the Letter of Intent that something must be done to decrease the total burden of public expenditure, or the net borrowing requirement, what, as a reasonable man, must one agree by way of relief?
I am not persuaded by any arguments which suggest that the gas and electricity industries should not draw their long-term finance from the market. A definition of a subsidised rate of interest has been given by the Chief Secretary, but I think that in another way we could say that these institutions enjoy a subsidised rate of interest, and I think that they are essentially commercial growth industries which, sooner or later, will have to pay the going rate.
In an article in Lloyds Bank Review, the Chairman of the Electricity Council says that the industry cannot possibly 62 borrow on the market because it would be unfair to private enterprise and to local authorities. He deals with this question in about 12 lines. That is a totally unsatisfactory situation.
I welcome the Bill as an interim Measure. I hope that the Chief Secretary has made a note of the two points which I have raised—one on my behalf, that we should have a more intelligent presentation of the Budget, and one on behalf of local authorities, that something should be done to help them towards greater rationality and stability in their financing by the Government accepting responsibility for providing them with about 70 per cent. of their total capital requirements.
§ 4.52 p.m.
§ Sir Henry d'Avigdor-Goldsmid (Walsall, South)
The hon. Member for Stoke-on-Trent, Central (Mr. Cant) has made one of his usual very sensible contributions to these debates. I always listen to him with interest. He comes as a successor to a triumvirate of Members, all of whom were greatly liked on both sides of the House. I feel that he is a worthy successor to them.
I am aware that there is a more glamorous topic for discussion later and, therefore, I hope that the hon. Gentleman will forgive me if I do not follow him in lamenting the woes and tribulations of borough treasurers, but simply say that I am substantially in agreement with what he said.
We are discussing no less a sum than the transfer of the entire National Debt —£32,000 million. Unlike my hon. Friend the Member for Worthing (Mr. Higgins), I prefer the older and more familiar appellation. This is quite a large sum, especially when one ascertains that on page 1034 of the 68th Edition of Whitaker it is listed under the conglomerated heading of "Homes of Sport". It is important that the Post Office sorting department should be on its mettle in dealing with the N.L.F., because otherwise there must be a danger that the Government of Aden, who are now claiming that £60 million is not an adequate subsidy for their future operations, will find themselves landed with a bill for £32,000 million. Therefore, the Post Office must get its sorting machinery in order.
63 The Bill follows a pattern which is very familiar to the Chief Secretary as a result of his earlier avocation, in which he distinguished himself so much and to which we all hope he will shortly be able to return and give it added lustre. This is the old situation of a public company in trouble. The first thing which a public company in trouble does is to get a new managing director. The new managing director in this case was sitting on the right of the Chief Secretary earlier; he has now retired. Then it gets a new accounting system—and this is the new accounting system in this case. We have not yet reached phase III, but we shall very soon do so.
It will then be shown by the managing director that there should be some delay in the publication of the accounts. This was a theory laid down by Mr. Nigel Lawson some years ago—that bad figures take longer to add up than good figures. We await the next stage in the postponement of the publication of the accounts. Following that, we have the receivership and the dismissal of the chairman. I tell the Chief Secretary, without any personal feelings, that we are eagerly awaiting that event.
The debate turns on the net borrowing requirement. Here I have a few important points to make. The net borrowing requirement was specifically referred to in the Letter of Intent which we discussed last week. Therefore, it is, presumably, a term of art and a term with meaning. Examining this Bill, there will be contributions to the net borrowing requirement. There will be the nationalised industries, perhaps at £900 million, and the local authorities, perhaps at £600 million, making a total of £1,500 million. Presumably, it will be estimated that £500 million will be generated by those same bodies towards their capital expenditure. However, there is something to put on the other side.
I noticed that neither the Chief Secretary nor my hon. Friend the Member for Worthing (Mr. Higgins) referred to Clause 7, which deals with the Exchange Equalisation Account. I want to go into this in a little detail, because the movements on the Exchange Equalisation Account are in exactly the opposite direction to those on the other accounts. The 64 Account has a borrowing requirement when the £ is strong, and it has to borrow pounds to supply the overseas buyers of pounds who are tendering foreign currency in exchange. On the other hand, when the £ is under pressure, the Exchange Equalisation Account must pay out foreign currency and it takes sterling in. Therefore, one can say that the Account works in exactly the opposite direction to the main principle of our net borrowing requirement.
One can easily foresee a situation in which the net borrowing requirement is kept to £1,000 million, as has been suggested, because the Exchange Equalisation Account was so much in sterling funds. This would be a source not of strength, but of weakness to the economy. However, if we are using the term "net borrowing requirement", because of the way in which the Bill is now couched, it will affect the matter most closely.
That is something which must be brought out in the statement which is to be prepared. I join my hon. Friend the Member for Worthing in hoping that we shall have a pro forma, but, whether we do or not, I do not think that the House will tolerate the fact that this very important figure—the net borrowing requirement—should be diminished simply because sterling is under pressure. The Exchange Equalisation Account has, therefore, been not a borrower but a lender of sterling, and has acquired sterling and, therefore, diminished the net borrowing requirement of the National Loans Fund. I hope that the point is taken.
When I look at the other points in the Bill, I agree that it is a matter of bookkeeping. I was attracted by Schedule 3, on page 30, "Local loans to be extinguished". Peterhead Harbours Trustees are to have £36,826 18s. 10d. extinguished. Wick and Pulteney Harbours Trustees are to have £28,354 10s. 8d. extinguished. I observe that in my own county, Staffordshire, the South Staffordshire Mines Drainage Commissioners are to have £40,593 12s. 9d. extinguished. I should be sorry to look at the next edition of this Bill to see the loans extinguished which have been made to the nationalised industries, because I do not think that they would be covered in five, six, seven or even eight figures.
65 May I draw attention to Clause 21, which states, on audit and accounts, thatthe Treasury shall prepare in such form as they may prescribe an account of payments into and out of the Consolidated Fund…".We must go into that more deeply. If this is simply a cash account, then clearly the actual issues from the National Loans Fund on current account—for the local authorities and nationalised industries—must be clearly shown, and there must he a differentiation of the capital movement, which would also be accounted for, to the Exchange Equalisation Fund, especially as under an earlier Clause the transactions with various international bodies are specifically excluded.
If this is not done we shall be producing just another misleading form of accounts, and doing so at a time when people have lost all confidence in the monthly form of accounts which we produce. Every month we issue a statement of our gold and dollar reserves. Every month we know that that statement is only a partial and fragmentary glimpse of what is going on. When we borrowed £35 million for a year from a Swiss bank, our reserves went up by that amount. But so did our liabilities in the same year—or in this case, to a substantially larger extent. I ask the Chief Secretary, who is an experienced accountant, not to feel that the Treasury can go on pulling the wool over the eyes of everybody who reads the account. We know that there is no real substance in this monthly statement of the gold and dollar reserves, because we know that it does not take into account the liabilities which have been incurred.
I beg the Chief Secretary, most genuinely, to see that this reformed statement for the National Loans Fund escapes from being regarded as an equally misleading document. It should show the net issues and not simply permit the position to be obsecured by allowing a lot of other material in some of it, as in the Exchange Equalisation Account, where it has exactly the opposite meaning to the issues which I have discussed. If not, people will say that no greater reliance can be placed on this statement than on the statement of the gold and foreign exchange reserves, and we must ask who is fooling whom.
§ 5.5 p.m.
§ Mr. John Nott (St. Ives)
I congratulate my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor Goldsmid) on the number of valuable points which he made. He is quite right in saying that the publication of the gold and dollar reserves has increasingly become meaningless and that the Government and the country have nothing to gain from statements of this nature, which everyone throughout the world know to he misleading. I completely agree with him that it is time that this type of practice ceased in the presentation of our national accounts and monthly statements.
There are many other fields where we need a more open society, if I may use that phrase. To quote but one example which has not yet been mentioned in the debate, when the Bank of England issue a loan on behalf of the Government none of us knows how much is taken up by the general public and how much goes straight into the hands of Government Departments, and none of us knows how much is peddled out to the public over a period of time. I refer to tap stock. None of us knows how much of this Government debt is in a floating form, how much is ways and means and how much involves gilt-edged advances. Even in the case of Government borrowing there is a whole host of factors which would throw much light on many activities of the Government which I believe could be made available without much danger to the country.
My hon. Friend the Member for Worthing (Mr. Higgins) referred to the whole question of the presentation of the accounts, and the difference between real and money income forecasts. I entirely agree with him that there is no reason why this aspect of the presentation of our accounts should continue to be kept confidential by the Treasury. The hon. Member for Stoke-on-Trent, Central (Mr. Cant) also mentioned the point. We want much more of an open society, so that the people can judge what is the true position. It deceives no one overseas and it does not help the country for all these important facts and figures to be undisclosed. The hon. Member said that these figures are made available to a large extent in the United States, and until Treasury and Bank of England secrecy ceases in this country, we shall not have 67 the national accounts in the way in which most hon. Members would like them to be produced.
I had not intended to take part in the debate, because I do not begin to understand a large part of the Bill, but I am provoked into saying a few words by the comments of the hon. Member for Stoke-on-Trent, Central about local authority borrowing. We have discussed this in the House before. I do not agree with anything that he said, although I agree with my hon. Friend the Member for Walsall, South that the hon. Member makes a valuable contribution to our debates and that we always listen to him with the greatest of interest. For a few moments I want to answer some of the points which he made about local authority borrowing.
I agree with him that at present there is a great deal of confusion in capital borrowing, but I emphasise a point which I made in an interjection—that if the local government structure is reformed and we come down to a system in which there are 30 or 40 first-tier local authorities, and only those first-tier authorities have the power to borrow in the market, then at least two-thirds of the confusion will cease. Most of the confusion arises as a result of the fact that there are over 1,500 small non-county boroughs, rural and urban district councils fighting one another in the market for funds, which, clearly, makes no sense. Over 100 counties and county boroughs in the country are also fighting one another in the market for funds.
If we have a reform of local government structure which gives some kind of independence to Scotland and Wales—why should they not have it if they want it?—and similarly we come down from 100 counties and county boroughs and 1,500 smaller authorities in England to a system in which there are 40 first-tier units who are borrowing, we shall have a much clearer position.
I do not like the hon. Member's suggestion, because it strikes at the root of local government independence. If we force local authorities into the P.W.L.B. for funds we remove from them the whole of their independence. Local government independence is something which we should encourage. It is absolutely crucial to 68 local democracy. I do not believe that it can be maintained if local authorities are forced back 100 per cent. into the P.W.L.B. I foresee a time when local government has been reformed and we have 40 units borrowing in the open market. That will make a great improvement in the whole of the arrangements.
§ Mr. Cant
May I correct one point? I was not suggesting that money should be obtained from the P.W.L.B., but merely trying to interpret the recommendation of the Institute of Municipal Treasurers and Accountants that a substantially greater proportion than 50 per cent.—I said 70 per cent—should be so borrowed. The Institute says that in the interest of local democracy 30 per cent. is something local authorities should scratch for themselves. I think that this is a compromise.
§ Mr. Nott
The report to which the hon. Member refers, speaking from memory, is the report of a sub-committee set up by the I.M.T.A. to consider the problem and it does not represent the I.M.T.A.'s views as a body. I think that 10 people produced the report. I do not agree with a single word of it. Those Treasurers I have spoken to do not agree with it either.
There is also room for the development of regional loan bureaux so that when we have a lesser number of local authorities, say 40, borrowing in the market, those which have a surplus at the end of the week or the month through the bureaux could help local authorities which have a deficit at the end of the week or month. In the North, there is a bureau which operates from Manchester. It has provided a very great service. These bureaux are doing this work as a co-operative and they save local authorities having to pay commissions in the City. That makes the treasurers very happy and I am all in favour of it. There is great room for the development of regional loan bureaux, I should like to see them encouraged and superimposed on the new structure of local government which I foresee coming about.
There is another reform I should like to see, which also would improve the unruly situation which exists. That is for local authorities to try to rationalise the way in which they are allowed to borrow under present legislation. There 69 is no reason why local authority borrowing should not come down, first, to a deposit receipt to cover all borrowing tip to one year, the issue of a bond for one to five years and the issue of stock for over five years.
Some local authorities are using mortgages which involve the mayor putting on his robes and sealing a document. That is out of date. Local authorities should bring their methods up to date within the context of existing legislation. Then we could have three types of borrowing instrument. It is largely the fault of the local authorities and not of the Government that they do not bring themselves up to date in this way.
I am in favour of bringing local authorities much more within the main borrowing market. The hon. Member for Stoke-on-Trent, Central rightly referred to the dangers of £500 million short-term money being deposited from overseas through United Kingdom banks aid then being lent in the local authority market. There are great dangers in this. It led to the previous White Paper and the reorganisation of local authority borrowing. If the Government and the Treasury attempted to bring these deposits into the discount market over which the Bank of England has great control as a result of open market operations, this problem would be avoided.
The reason we have so much confusion and danger now is that local authorities are operating in their own money market over which the Bank of England has no control at all. If more of this temporary borrowing and more of this mortgage borrowing could be brought into the main discount market over which the Bank of England has the closest control, some of these problems could be overcome. They could be overcome by encouraging local authorities to issue more bonds which could be placed on the discount market.
It could also happen by helping local authorities to issue more bills. At the moment, bills can be issued by local authorities only if they have their own Private Acts of Parliament. Then they are allowed to issue bills through the discount market, as Manchester has done. Otherwise local authorities are not allowed to issue bills. Enabling legislation which would allow all local auth- 70 orities to issue a certain amount of temporary money through bills would bring a lot of short-term borrowing into the discount market which at present is outside that market.
I accept as valid the Treasury argument that if this is brought into the discount market and local authorities are allowed to issue three-month bills instead of three-month money, the credit base would be expanded. The Treasury argument is that this must not be done, because it would be inflationary. That is a valid argument which cannot be denied. One has to put on one side the dangers of having hot money coming in from overseas through the banks into a market over which the Government have very little control against the disadvantages of bringing them into the London discount market where the bills have an inflationary effect, but over which the Bank of England has the closest and minutest control. I should favour the latter.
Likewise with the bonds. If local authority bonds which are now issued on the discount market were made eligible security at the Bank of England in the same way as Government bonds are, that would immediately give an enormous boost to the market and enable local authorities to borrow much more cheaply. Until three years ago the Treasury held out against any development in this field, but it has grown from nothing to £300 million in three years.
If the Treasury is prepared to change in that way and to see a type of borrowing go from nothing to £300 million in three years, and to admit that it has not caused much concern, it should be prepared to open that market even more and to expand it. It can be expanded at present only by making local authority bonds negotiable at the Bank of England. Again I see the difficulties about extending the credit base, but this is an experiment which could be tried.
I make those points in answer to the hon. Member for Stoke-on-Trent, Central. I do not know whether they are actually, relevant to the Bill, but in Committee an important matter for discussion will be the whole question of local government borrowing, which forms a huge slice of government borrowing as a whole. I would not like to see a loss of local government independence in any attempt to 71 force local authorities into the P.W.L.B. Let us revise the structure of local government and reform the methods by which local authorities borrow. That would overcome the problem.
§ 5.20 p.m.
§ Mr. Nicholas Ridley (Cirencester and Tewkesbury)
I shall be touching on the problem which my hon. Friend the Member for St. Ives (Mr. Nott) dealt with so effectively, but I should like first to say a few words about another aspect of the Bill. Before doing so, however, I should like to join my hon. Friend the Member for Walsall, South (Sir d'Avigdor-Goldsmid) in regretting the title—National Loans Fund. I think it reminds us all too closely of recent events in the Middle East, to entitle it "N.L.F." Indeed, I was wondering whether above the line expenditure in future is to be known as "Flosy".
This is technically a Bill for what the Minister of Power the other day called shrivelled bookkeepers. I am very glad indeed it has been widened by previous speakers to take in all the transactions which the accounts will represent. I very much hope that it will be possible to see in the accounts presented to us in future exactly whether they take a deflationary course or an inflationary course.
When I read the 1965–66 Financial Statement I saw there an item called "Floating debt net, £409 million" and another item for interest-free notes, £680 million. These seemed to make the figures add up to £1,000 million, and I wondered just how the experts understand the national accounts, let alone novices like myself. I could not wonder that it resulted in an inflationary situation at that time, from which we had later to suffer very much indeed.
In deflationary times, such as, I think, the present time, a large Government surplus is put into the Consolidated Fund to facilitate Government lending. This, I hope, will be very clearly shown, because at the present time it is growing to very alarming proportions. I think I am right in saying that the percentage of gross national product which has been invested has been running at about 19 per cent. to 20 per cent. for a number of years, and of that saving has averaged 72 about 16½ per cent., leaving a shortfall in investment to be made up by taxation of 2½ per cent. That 2½ per cent. has jumped this year to 4 per cent. and we are this year being currently taxed to the extent of £1,132 million in order to make up the gap between investment and saving as a nation. This is an enormous sum of money. If this is to be so in the future it must be clearly shown.
Added to that, we have the alarming situation that we as a country are investing far too little. I think we are investing some 20 per cent. to 21 per cent., as I said, while Sweden is investing 32.8 per cent. Wherever we look at comparable industrial countries we find that by comparison ours is an inadequate investment. So we shall, if we attempt to match that investment, have ever greater need to increase taxation to make up the shortfall between investment and savings.
We have the ridiculous situation where we are severely hitting the saver and investor by every form of taxation we can think of—Selective Employment Tax. Corporation Tax, Capital Gains Tax. Income Tax, so making it less profitable to save, and at the same time we have had to continue to subsidise investment in the nationalised industries through the Public Works Loan Board, and further subsidise new investment by means of investment grants.
If the country is short of tomatoes it is a strange way of going about it to make life particularly difficult for the tomato growers so that they tend to go out of business, and, at the same time, subsidise the consumption of tomatoes by subsidising the retail price so that the demand for them increases. If we do this we get a growing gap between supply and demand for tomatoes—which is what we are now witnessing. If the National Loans Fund does nothing more than bring out the very great danger of a situation such as this I think it will have been very well worth while. While this is so the one thing we can do to improve the situation is to take fiscal measures, but it would be wrong of me to go into that now.
I believe that the hon. Gentleman the Member for Stoke-on-Trent, Central (Mr. Cant) wanted greater recourse to the Public Works Loan Board. It will be necessary unless something can be done to bring more money on to the market 73 generally by saving and investment. I have a great desire to see the nationalised industries go to the market for their capital. It is an enormous sum, £800 million or £900 million, which we are lending them from the Fund, and that is a very severe burden indeed, but I do not believe we can get local authorities or nationalised industries to go to the market till funds are available for them to borrow—an extra amount of something like:l0 per cent. to 40 per cent., if they were to go at present for all the money which they are borrowing.
I therefore think that the first thing to do at that stage is to equate the amount of savings and the amount of investment which is available. I hope that we shall do this, so that we can gradually push back on to the market all those classes of public or semi-public borrowers who are at present getting substantial dollops of taxpayers' money from the National Loans Fund.
It is necessary to do all we can, before we can send them to the market, to make sure that they are also borrowers of equal weight and strength and importance to other borrowers. It would be quite ridiculous to send the electricity industry just as it is to the market even if the funds were available—I am quite sure they are not—for the £300 million it is taking a year. I say that because the industry is so much bigger and stronger, and is a sort of monopoly, so that it could be guaranteed to obtain the funds it wanted at the expense of millions of private concerns which would find they would have to pay more, if, indeed, they could get what they wanted at all, for the capital they need. So I believe we have got to redress the imbalances in shape which some of the nationalised industries have, before this becomes possible.
My disappointment about this Bill is that it neither looks to the time when we shall tackle shortage of funds nor to the time when we shall tackle the imbalances of size and shape of the nationalised industries. It prevents this very desirable course from being possible.
§ Mr. J. T. Price (Westhoughton)
I am very interested in this. I myself have made to the House on a number of occasions small contributions on the same theme of the need to consider, at least, whether the nationalised industries should 74 use the market more than they do. What at the moment interests me is that the hon. Gentleman said they would be an unnecessary handicap to private concerns; they would be so strong in competition they would be sort of swamping the market. What sort of restriction has the hon. Gentleman in mind for placing on nationalised industries when they seek a share of the capital sums available?
§ Mr. Ridley
I am grateful to the hon. Gentleman for giving me the chance perhaps to make clearer what, perhaps, I did not say clearly enough the first time.
If we add to the market something like 30 per cent. or 40 per cent. of extra demand for funds, which is what the nationalised industries represent—it depends, of course, on circumstances from year to year—and those funds are not available, there is the effect of creating an enormous shortage of savings to match investments which are being made. Of course, this is an impossible operation to do overnight. That is why I say we must first of all have policies gradually to increase the supply of savings to meet the needs of the market. Secondly, having achieved a balance, the effect will be that a very large borrower like the electricity industry, which can always put up prices or give a sort of semi-Government guarantee, and which will pay the interest rate and will not welsh on its obligations, will be able to get its money at the expense of people who have not that great financial strength.
§ Mr. J. T. Price
To round off this point, is the hon. Gentleman aware that, in making that proposition, he is flying in the face of the experience of other European countries and that about 90 per cent. of the capital needed for the indirectly nationalised industries in Italy is raised on the open market very quickly and without any complaint from the private sector?
§ Mr. Ridley
I do not doubt that, but the various companies go to the market as quite small units and borrow £5 million, £10 million or £20 million. It is a different matter to go to the market and borrow £284 million, as the electricity industry has, £288 million, as the Coal Board has, and £133 million, as the gas industry has. Figures of that magnitude probably would be too much at 75 present, until the funds are there to meet them.
§ Mr. Nott
Could my hon. Friend clarify this point? At the moment, the electricity industry, the Coal Board and the other nationalised industries borrow on the market only in the sense that the Government borrow on their behalf. Is not the distinction that we are financing them more out of taxation? If the electricity industry was to borrow on the market and its borrowing was underwritten by the Bank of England, would the availability of funds be any different from the situation where the industry borrowed from the Bank of England, which issued Government Treasury bills, gilt edge and other stock? I would be interested to hear his comments.
§ Mr. Ridley
There is no difference between allowing the nationalised industries to borrow on Government guarantee and issuing Government stock, as happens at present. So long as we have the Government guarantee, it has to be done in that way. If the nationalised industries are made sufficiently independent and right as to size and shape, however, there is no need for a Government guarantee and they can borrow on their own credit. The perfect example of this is British Petroleum. To all intents and purposes, it is a nationalised concern, but no one attempts to interfere with it or tell it how to borrow. It goes to the market like everyone else and borrows in a perfectly rational way.
In these more difficult financial times, the Government surplus has grown from £400 million a few years ago, through £900 million last year to about £1,200 million this year. Because of the shortfall in investment, the money can only be used by the Government either to give to local authorities or to give to the nationalised industries—
§ Mr. Ridley
I accept the hon. Gentleman's correction. But the Government are not borrowing on the market the money which they are lending. They are taxing people to the extent of £1,200 million extra to lend to the nationalised industries. Therefore, we are not replacing lending with lending, but taxation with lending, and that is why it is not possible to perform this operation at pre- 76 sent. I hope that that will not be used by the Government as an excuse to pretend that all is well when there is this shortfall in the country's savings.
I hope that these acounts will show the actual drawings of the nationalised industries at quite frequent intervals. At the end of each year, we get a statement of what the borrowing of each industry have been, but that is not enough. Last week, for example, suddenly we had the Coal Board asking for another £200 million as if it was a 2½d. stamp. We need to know the amounts that they have drawn against their borrowing entitlements. I hope that the Treasury will think of some way whereby it can become public knowledge how much they are taking up of their borrowing entitlements and at what times they do it, so that the country can be fully informed of the demands coming on the N.L.F. from this source. It is not by intention to delay the House for very much longer, but I should like to ask one or two questions about paragraph 10 in the letter of intent which the Chancellor sent to the Managing Director of the I.M.F. He has undertaken to keep the borrowing requirement down to £1 billion. I cannot quite make out exactly what the borrowing requirement was last year as defined in that letter. It is given asthe Exchequer borrowing and special transactions ".The figure was £287 million after the Budget changes. On the other hand, we lent £1,334 million to industry and to the local authorities. Is the right hon. Gentleman treating the special transactions as being separate from the borrowing requirement, or are the two together the £1,000 million which we must not exceed? I am not clear what it means.
It is certain that we have never touched the £1,000 million in the past, if it means the net borrowing and special transactions together. I hope that the Financial Secretary will explain what it means when he comes to wind up the debate. It is not clear what the net borrowing requirement was at the time of the last Budget, and it will help us to understand the exact meaning of the commitment into which we have entered with regard to our creditors.
Finally, I make one small suggestion, and it is that greater latitude should be given to the National Loans Fund in 77 respect of loans which it makes to various industries and bodies. At the moment, these loans tend to be on fixed terms of years at the current rate of interest. But I do not see why there should not be a number of alternatives on offer to those who would like to borrow. For instance, for long-term investments lasting up to 100 years, such as hydro plant, it might be appropriate to borrow over that sort of period. For short-term investments, in which one might include some aircraft, there could be short-term loans available, in which case higher rates of interest would be required.
It would help the nationalised industries if there was some flexibility in the types of loans on offer, and it would be possible to introduce the rather gimmicky ideas which they have in foreign countries, such as the French loans which the E.D.F. issue and which go up in value in accordance with the growth of electricity sales. There are several stocks of this sort of which hon. Members will be aware. I do not say that they are necessarily right for our present situation, but, while there is not a market and while the nationalised industries cannot shop round to produce the cheapest loans, there is a lot to be said for the Treasury, through the National Loans Fund, to try and give them some alternatives so that they (an borrow for periods and at rates of interest which they think suit them best in an effort to bring them into an even more commercial atmosphere than they have at the moment.
With those few comments, I welcome the Bill so far as it goes. But I agree with my hon. Friends that it does not go nearly far enough, and I hope that we shall be able to improve it in Committee.
§ 5.40 p.m.
§ Mr. Peter Hordern (Horsham)
This has been an intimate, not to say rather esoteric, debate, but none the worse for that.
We listened with interest to the remarks of the hon. Member for Stoke-on-Trent, Central (Mr. Cant), who, as usual, is very well informed about local authority finance. We also had the great pleasure of listening to my hon. Friend the Member for St. Ives (Mr. Nott), whose knowledge of local authority finances is even more admirable, if that 78 is possible, than that of the hon. Gentleman opposite.
My hon. Friend the Member for Walsaid, South (Sir H. d'Avigdor-Goldsmid) put one or two pertient points about the exchange equalisation account, which I hope the Chief Secretary will comment upon during the course of his remarks. He made the very important point, not only in relation to this Bill, which has a much better effect on our national accounting system, but generally, why not publish in much more detailed form and be far more truthful about the Government's own statement of financial affairs? He referred to the publication of the gold and foreign exchange reserve figures which are published each month. It really is about time that these figures were published, and published truthfully. If ever there was a time to publish them, truthfully it is now, after devaluation. If this is not the time to do it, I do not know when is. I am grateful to my hon. Friend for making that point, which was also mentioned by my hon. Friend the Member for St. Ives.
Any Bill which has the effect of transferring the whole of the National Debt and which is designed "generally to make provision for the management of the Government's financial business", which are the words of the Ways and Means Resolution, is clearly no small creature. Yet it is not quite such a whale as it looks and is in fact a rather modest step forward on ground which has been prepared, perhaps somewhat differently, but which has been prepared for a long time.
There was a White Paper in 1963, called "Reform of the Exchequer Accounts", which described how our present Exchequer accounts date from the Sinking Fund Act of 1875, when the aim was to produce enough revenue to cover expenditure and, if possible, to reduce the National Debt. In fact it was still possible for Chancellors to include proposals for the reduction of the National Debt until just before the first war—certainly up to 1908—but since then Chancellors seem to have had many other priorities.
However, the present form of Exchequer Accounts is still, by and large, determined by the distinction drawn in section 4 of the Sinking Fund Act 1875, between expenditure which can specifically 79 be met from borrowing and all other expenditure. This distinction is not concerned with the fact that during the financial year issues from the Consolidated Fund may be, and are, met from temporary borrowing, or that the Government has no specific powers to borrow to meet more than a small part of its own direct capital expenditure.
So the Exchequer Accounts, which are divided above the line and below the line, and which were changed only in 1965, I think, are objectionable primarily because people think that it is devised to distinguish between current and capital accounts, whereas in fact it does no such thing. Nor is it possible to claim that the Exchequer Accounts in any way reflect what is generally conceded to be the Chancellor's right to manage demand by deliberately adjusting his net borrowing requirements between fairly wide limits That is not in dispute. There is an overwhelming case, therefore, in favour of altering the Exchequer accounts so that they are at least intelligible in the circumstances of our time.
The Economist, commenting on this new Bill on 4th November, said that:the advantage will be that the meaningless figure which used to be called the Treasury's overall budget deficit, and is now called its overall borrowing requirement, will henceforth not be called anything at all, so that the size of it will no longer scare foreigners out of their wits.Fortunately this is not the purpose of this Bill, because, if it were, it would show a lamentable ignorance of the expertise of the gnomes, who are, quite rightly, much more concerned about the size and growth of public expenditure as a whole and of the public sector as a proportion of the gross national product. The question, therefore, is: what precise form should this reform take?
The 1963 White Paper said:No useful economic or financial function would be served by dividing up Government expenditure into one category which had to be met from revenue and another which had to be met by borrowing …It is suggested that the natural division is between the transactions leading up to the net financial requirement, on the one hand, and the transactions showing how the requirement is met, on the other. The former, it is suggested, might be called the Budget account and the latter the 80 Financing account. The new Budget account would, therefore, show the progress of Exchequer receipts and issues under headings which correspond to the way in which taxes and expenditure have been authorised by Parliament. It would also show the effect of budgetary transactions on the cash position of the Exchequer, which is of cardinal Importance for debt management and monetary policy.
We would like to know how the Government see the new accounts being presented. Are these recommendations to be carried out? So far as I can see, the Government do not intend to go anything like so far as these recommendations, but it would be helpful to the House to have in precise form how they see their new accounts. We gained some clue from the Financial Secretary in the Ways and Means Resolution when he said,…from now on the Exchequer accounts will simply show what the Government have received in taxation and what they have spent on both capital and current account"— [OFFICIAL REPORT, 29th November, 1967; Vol. 755, c. 549.]The National Loans Fund then simply plays the role of residuary legatee or bank of last resort so far as the Exchequer accounts are concerned.
I have only one point to add to the effective presentation of the accounts, and that is to ask whether the Government propose to adopt the recommendation of the Radcliffe Report, that the Exchequer accounts and local authority accounts should be published quarterly. I hope that they will do so. In any case, it is the duty of the Government to publish the Exchequer accounts in their new form as early as possible, and we trust that this will be done.
There was one further point raised concerning Clause 21(3) of the Bill, which says:For each such financial year the Treasury shall also prepare in such form as they may determine…We on this side of the House find this unsatisfactory. The form in which these statements are to be made should be predetermined and known by the House; not a form which the Treasury may think up at its own pleasure.
I come now to the National Loans Fund. It would be quite wrong to imagine that the sole task of the Fund 81 is to act as the lender of last resort to the Government. As I see it, its main function will be to act as the repository of our National Debt and the effective means by which the Government's monetary policy can be carried out. But it will also have a further obligation. I refer particularly to the financing of the Public Works Loan Board, referred to by the hon. Member for Stoke-on-Trent, Central. The Public Works Loan Board has a long and rather confused history, particularly in recent years, in regard to calls upon its resources.
Under Clauses 3 and 4 of this Bill, both the method and the amount of the Fund to be made available to the Public Works Loan Board are to be changed, and I thank these need to be looked at very carefully.
Under Clause 3(8) the Local Loans Fund is to be wound up as from 1st April, 1968. That is the difference in form. Under sub-paragraph (11) we find that the loans that the Loan Commissioners may make correspond to the loans made under Section 9 of the Public Works Loan Act, 1875. There is no effective difference, therefore, in the type of loans to be made, but a very distinct difference in both the method and the amount.
Nobody could claim that local authority financing in recent years has been either tidy or desirable in its method. It really is very important to get a sound and sensible policy for local authority financing, and I do not think that that is what we shall be getting under this Bill.
The problem arises because local authority current expenditure and capital requirements never cease to rise very rapidly. The estimate for local authority capital expenditure for 1967–68 is £1,526 million I prefer the old terminology myself—against £1,403 million for 1966–67. These are very large increases in terms of money, and can be compared against an accumulated loan debt of the local authorities of some £12,000 million.
§ Mr. Hordern
I do not think so, but I will refer to this later. I believe that I am right, but I am grateful to my hon. Friend for pointing this out.
82 It was originally intended in the 1963 White Paper referring to local government finance that up to 50 per cent. of each authority's gross annual long-term borrowing requirements would eventually be met by the Public Works Loan Board and that the increased access should be allowed at the rate of 10 per cent. each year. The rate at which the Public Works Loan Board was lending, which was then 5⅞ per cent., became very favourable when Bank Rate was raised to 7 per cent.
Consequently, the Board lent £535 million in 1965–66 against a Budget estimate of £360 million and £518 million against an estimate of £400 million in 1966–1967. There has also been considerable pressure from local authorities for short term funds. A very efficient market in short loans to local authorities has grown up in the City and my hon. Friend the Member for St. Ives has a considerable knowledge of these operations.
The trouble is that it has become so efficient that it has attracted large funds from overseas, so much so that the Bank of England has reckoned that a quarter of all temporary borrowing came from overseas. As a result we have had the unfortunate spectacle of hot money supporting long-term local authority capital projects—borrowing short to lend long, the classical route to bankruptcy. Nor does it seem at all likely that this situation will be changed. At the end of May the Government announced new rates for local authority quotas then in line with the rate at which the Government could borrow. Under the Housing Subsidies Act local authorities could get Government subsidies for the difference between 4 per cent. and the rate at which they could borrow for new housing, which was half their total borrowing requirements. Since Bank Rate has been increased to 8 per cent. this provision is likely to prove very expensive indeed. The important consideration with regard to this Bill is whether the existing 34 per cent. quota for local authorities and 44 per cent. for focal authorities in development areas is to be increased.
The present Home Secretary said on 7th November:It is my policy, as it was that of the right hon. and learned Gentleman, that local authorities should be able to borrow more from the Public Works Loan Board in future 83 than they have done in the past."—[OFFICIAL REPORT, 7th November, 1967; Vol. 753, c. 866.]We need to know whether this access is to be increased in order to judge whether the £1,000 million mentioned in Clause 4 with its further three renewals will be adequate. As a general principle it must be desirable for authorities to fund much more of their short-term debts. This will be an additional factor besides the ever-increasing demand for funds.
If the quotas are to be raised to 50 per cent., which seems very desirable, the £4,000 million mentioned in the Bill is likely to last for just a few years. In the past we have been accustomed to having debates on the Public Works Loan Board Bills which attracted many hon. Members interested in local government. I observe that by this Bill the extensions are subject to an Order passed by affirmative Resolution of the House. We shall be certain to have more of these debates. Presumably when these amounts are consumed the Government of the day would have to introduce further Public Works Loan Board Bills, I would like the Financial Secretary to confirm that this is so and that they will be introduced in much the same form as the old ones.
If it is right that in principle local authorities should be able to borrow from the Government on a medium-term basis, it is difficult to see why this should not also apply to their short-term borrowings. The effect of retaining the quota system at 34 per cent. has been to put increasing pressure on the whole of the short market. Local authorities are competing against each other for short loans and interest rates have therefore been forced up. If the purpose embodied in Clause 12 is to have a rational and unified debt management policy, which is very desirable, it seems absurd that this should not also apply to short-term loans.
In its quarterly review of December, 1966 the Bank of England said that if the Exchequer was forced to assume responsbility for local loans, it may not be able to attract enough lending and would therefore have to borrow through the banking system. Presumably this means through issuing Treasury Bills. There has been considerable pressure on the part of local authorities to issue their own 84 Bills. The objection has always been that they would form part of the banking system's reserve ratio of deposits, and thus be inflationary in their effect. Exactly the same argument can be applied to Treasury Bills, but at least Government Bills could be more easily marketable and therefore cheaper.
The Government are in great difficulties in their financing of local government expenditure and this Bill will do nothing to improve that situation. One day the nettle of local authority financing must be grasped. Nothing could be more ludicrous than to give Government sanction to local authority expenditure and then decline to use Government authority to raise the necessary funds. The only effect is to hamper the Government's own financing power.
During the debate on the Ways and Means Resolution the Financial Secretary was asked some questions about interest rates which would be available to local authorities by my hon. Friend the Member for Worthing (Mr. Higgins). I will not go into this in detail because I see that it has been dealt with, but there seems to be a slight anomaly here. The Financial Secretary said of these rates:The answer is that they will rise and fall according to the cost to the Government and it is the cost to the Government at the time the loans are made that will be relevant.In another passage he said:If the Government have been prudent and borrowed earlier at a cheaper rate, there is no reason why the cheaper rate should not be available for the customer."—[OFFICIAL REPORT, 29th November, 1967; Vol. 754, c. 549–550.]I do not believe that both statements can be true. Perhaps the Financial Secretary can clarify this.
This Bill seems to be a sensible but small improvement in the presentation of our national accounts. It could also lead to improved debt management. We should like to see the accounts presented more often—at least half yearly, not annually. We will need to look at this in detail in Committee, but for the moment we welcome the Bill.
§ 5.57 p.m.
§ The Financial Secretary to the Treasury (Mr. Harold Lever)
I will do my best to deal with all the points raised by hon. Members. I am grateful to the hon. Member for Horsham (Mr. Hordern) for describing this Measure as a modest step 85 forward, because the Government are always very modest in whatever they put forward. They are also of a progressive character, as was very fairly conceded. No Government can ask for more than that by way of praise from an Opposition, however fair-minded, and no one can be more fair-minded than the hon. Member.
The hon. Member for Worthing (Mr. Higgins) can put at rest his fears that the interesting excursions upon which we normally engage on the Consolidated Fund Bill will be disturbed by this Measure. They will not be affected in the smallest degree by these arrangements. Those debates will continue. Their technical relationship with the Consolidated Fund Bill still remains, and hon. Members will have the same wide-ranging discussions that have characterised that Bill on previous occasions.
There will be no alteration of any kind resulting from this. Neither the procedure nor the time-table will be affected. The Bill will include borrowing powers, so that the House has its traditional reasons for ranging widely. The hon. Member was a little more critical of this Bill. We all understand why the hon. Member for Horsham could not be here throughout the debate. It produced that happy flexibility of discussion, and an agreeable contrast between the opening speech made for the Opposition and the Opposition winding-up speech. It may be that the course of the debate had a persuasive or illuminating effect.
At all events, the hon. Member for Worthing quoted incompletely—I am sure not with the intention of misleading —part of the Economist's complaint in connection with the Bill. As I understand the Economist's complaint, what it was really asking for was the publication of national income forecasts at Budget time. That is a completely different question from that now being considered by the House, which is whether we should not have, at the time that the Budget accounts are presented, which is the source material of all other discussion, also a national income forecast.
Many hon. Members have evinced a similar inclination. Perhaps they all read the Economist, or perhaps they have reached the conclusion independently. It is an interesting and not unattractive prospect that we could have this exercise 86 at Budget time. Obviously I can make no commitment, but I will certainly see that the matter is studied.
I come now to deal with the way in which these accounts will look when they are translated from statute to actual accounts for publication.
§ Mr. Higgins
I did not intend to quote selectively. I think that on looking at the full quotation the hon. Gentleman will find that I was, if anything, rather generous to him. The quotation goes on, after some other passage, to say this:…the real reform that is needed in Britain's present disgracefully misleading budget estimates is to let the country know on what forward estimate of money national income the detailed revenue estimates are based, so that people can then analyse how far any eventual shortfall below estimate is due to a deflationary shortfall in national income and how far to an inflationary shortfall in some taxes' yield; the Treasury still does not understand that, so long as it keeps this a state secret, every sophisticated observer at home and abroad will treat its National Loans Fund bill as a bad joke.The two are completely inter-related: they cannot be separated.
§ Mr. Lever
I hope that I have not unfairly summarised the Economist's complaint. I am not always absolutely capable of interpreting the journalistic jargon of economic publications, but I read the article to mean that what the Economist wanted was the publication of national income forecasts at the same time as the Budget was published—in this case the National Loans Fund accounts and all the other accounts it is proposed to publish. That is what I said. I do not think that that complaint is anything to do with this legislation.
They are really saying that this legislation can do something to improve the existing presentation of accounts. It does not give us what we would all like to have, namely, a national incomes forecast which would link with these accounts and produce a great deal of comment, information and judgment of a useful kind. That feeling has been echoed by the House today.
I will certainly see that it is looked at. It does not relate to the Bill, which is concerned purely with publication. It is purely a question, not of making forecasts of national income, which is an economic exercise—this is not an economic exercise —but an accountancy exercise. This is a 87 presentation of source material, rather like a company balance sheet presents the facts of the company's finances, its trading account and its capital account. Thereafter, there can be a chairman's speech putting, perhaps, a more illuminating interpretation upon the figures and expanding the background against which the company is operating. That is a separate question. What we propose in the Bill is to clear up the Government's balance sheet and present it in a more realistic, more intelligent, and less Gladstonian form.
The hon. Members for Worthing and for Horsham would like to see what it will look like. They hope that it will not be left completely to the Treasury's discretion to decide at the last moment and to change it from year to year. There is no such intention. I will ensure that there is a pro forma available which will show the House what exactly these new accounts will look like. I would hope that hon. Members would draw the conclusion that the new accounts are superior to the old accounts and that they are easier to read. The facts are all in the old accounts. We shall get these facts in the new form. I will ensure that the hon. Member for Worthing has a pro forma in his possession. In fact, I should be very surprised if there is not one in his box already. I will see that it is made available to the whole House, and indeed made publicly available. It will certainly be there before we reach the Committee stage.
I come to what has been turned into the vexed question of the nationalised industries' borrowing rate and what I said. I have puzzled over what HANSARD records me as having said. I think that I have found the solution. I hope that it is not slanderous of the reporter who took down what I said. If I am slandering him and if I did actually use the words recorded, I must take the blame myself.
I have come to the conclusion that I did then say what I propose to say now. I will simply repeat what I said then and leave out two "nots" which have been put in. I am now referring to a point raised by the hon. Gentleman who intervened usefully in the debate. I will leave out the two "nots" which quite gratuitously were put in by the HANSARD reporter. What I said was this': 88Without going to the nearest fraction of an interest rate, the Government will lend to a nationalised industry or a local authority at their own cost of borrowing at the time that they are lending—plus certain expenses. If the Government have been prudent and borrowed earlier at a cheaper rate, there is no reason why the cheaper rateshould be available. One "not" goes out of the window at that point, as hon. Members will see:there is no reason why the cheaper rate should be available for the customer. If the Government have borrowed sums of money at a higher rate earlier, there is no reason why the borrower shouldpay the higher rate. Another "not" goes out of the window.there is no reason why the borrower should pay the higher rate.Then the whole thing is quite clear.
I do not know why these two "nots" made their incursion. If it was my fault, I apologise to the House. If it was the reporter's fault, it will not be the first mistake of this kind which has been made in HANSARD reporting, alas. I know their difficulties.
I go on to say this—it is perfectly clear:The borrower will in each case pay the going cost at the time of borrowing on the borrowed money.This is absolutely consistent with what I said. Later, when I was pressed again on this point, I said this:The short answer is yes. The longer answer is that when we lend from the National Loans Fund to any of the borrowers, a local authority or the nationalised industry, the loan will have a term on it and the rate of interest fixed will be the rate appropriate for that term at the time of borrowing."—[OFFICIAL REPORT, 29th November, 1967; Vol. 755, c. 550]I was perfectly clear in my own mind, and if those two "nots" are eliminated it is clear that that is the position. I hope that the House is now satisfied, and I am sure that that position is the one that the House would wish to be the case.
I am asked what lending of the Government is not to be included in the National Loans Fund. Film finance, alas, does not always come within the description of undoubted fully repayable debt. Hence, that will not be put into the National Loans Fund, which is exclusively where the Government are lending money to absolutely solvent borrowers who, on ordinary going rate terms, may with confidence be expected to repay in full. For 89 this reason, unhappily, the National Film Finance Corporation borrowing has not qualified at all times.
§ Sir H. d'Avigdor-Goldsmid
I am amazed that the heavens have not opened and a thunderbolt has not landed on the lion. Gentleman's head whilst he has been describing some of the classes of borrowers who will help themselves from he National Loans Fund as thoroughly solvent in every way. Is he not aware of the vast extent and size of the deficits which are written off annually in respect of some of these loans?
§ Mr. Lever
It may seem a circular argument, but the nationalised industries, irrespective of their particular deficits from year to year, are thoroughly solvent, because the Government will ensure that their solvency in undoubted. Therefore, nobody expects them to default on these loans. In the longer term, I should have thought that in any event on their own merits all would be well. If it were not so, it would not really matter, because tree Government, among their duties, plainly have a duty to ensure the solvency of the nationalised industries. Therefore, when the Government act as agent of one of the nationalised industries and borrow the money, they have lent it to a perfectly solvent customer, although admittedly, in this somewhat circular way, the ultimate solvency depends upon the lender. This has happened in history before.
The other loans which will be out, apart from trifling matters of a very minor character which are more appropriate for the Committee stage, are loans to development corporations and developing area countries, where the loans are not always made on the absolutely commercial basis that applies in the case of nationalised industry and local authority lending. In those circumstances, it was thought right that the House should see those as voted by the House rather than lent out of the National Loans Fund.
Will there be forward estimates with the National Loans Fund? We now publish shortly before the Budget a White Paper on the Consolidated Fund lending. Something on these lines will continue to be published for the National Loans Fund lending. There will be no reduction in the total information of this kind available in the next accounts to the House. If the hon. Member has the pro forma be- 90 fore the Committee stage he will probably be satisfied about that point.
The Economist complaint is that it wants details of the national income to be produced in some paper published with the Budget and with these accounts. The complaint, at any rate, widened the debate for hon. Members and enabled them to tender advice on various economic matters not strictly related to the Government's purpose in presenting the Bill, which is strictly an accountancy purpose for clarifying the Government's accounts and not for clarifying the national accounts. These are the Government's accounts dealing with local authorities and other bodies and with the Government's own expenditure and tax raising. Whether the House ought to insist that at the same time the Government should trouble themselves to prepare a full scheme of some kind presenting the national income and the national accounts for economic information is another matter.
I know that this has been a strictly non-party occasion today, but I cannot help noticing that there is nothing like the exchanges between the Government and Opposition Front Benches to produce an impatient perfectionism which is missing in the long years when the capacity to make these interesting changes exists. There is nothing like the Opposition Front Bench to demand a better world when one has not got the obligation of instantly bringing it about. However, this is not a matter that I am complaining about, because it is probably true of both parties.
I think I have dealt with most of the points that were raised by the hon. Member for Worthing. If there are other detailed points which he would like to raise, we shall, no doubt, have ample opportunity to go into them when he is improving the Bill in Committee.
My hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant) was keen that we should increase the powers of the local authorities to borrow from the Public Works Loan Board. Of course, he is aware that we are now trying to increase the proportion from 20 per cent. to 50 per cent. This is a very interesting question on which the hon. Member for St. Ives (Mr. Nott) held forth. I can easily see that it is possible to have many points of view about it. 91 My general point of view follows rather closely that of the hon. Member for Horsham, to whose words I listened with great sympathy.
Where we have a great number of local authorities whose solvency in the end must be guaranteed by the Government, who have varying degrees of expert knowledge and expert advisers, whose requirements are often in small unwieldy sums at inconvenient times, it must be better to try to organise the borrowing of the local authorities at a central point by the Government. The Government thereafter can meet without all the paraphernalia of the market the detailed requirements of the local authorities. They can then provide the local authorities with short-term, medium-term and long-term funds according to their needs and according to which particular brand of economic and financial orthodoxy is in vogue at the Treasury at that particular time.
I know that the classical phrase of my right hon. Friend the Chief Secretary is often quoted out of context, that borrowing short and lending long is the road to bankruptcy. I am sure that he never intended this to cover all circumstances and all persons, though I have not consulted him on this point. I can only testify, on the evidence of my own eyes, that I have seen many people who have been borrowing short and lending long all their lives, with not bankruptcy as a result but a degree of affluence that would be the envy of almost every hon. Member. When it is done with the correct precautions and on the right basis, it forms the fundamental ratio of banking itself. Every large bank does precisely that, and those who do it in proper circumstances, far from ending up in bankruptcy, end up with a very prosperous business. Those who do it without adequate precautions, whether they be countries or bankers, are liable to end up in considerable embarrassment and difficulty.
For my part, I do not see it as a practical permanent situation where local authorities compete with each other at irregular times for irregular amounts in the market for their differing requirements. It does not seem to me to be to the general public advantage that Todmorden should fight Oswaldtwistle, offering one eight above each other when the 92 money is there, in order to get the money out of the market. I do not complain that the skilled advisers who advise these authorities do not do their best in these circumstances, but they cannot individually arrange their affairs as satisfactorily as a central borrowing point can. There are, of course, other factors which make it advantageous, one factor being that the Government are a large borrower and thus have a very marketable security. A local authority has to pay a bit more for its borrowing because it has not so marketable a stock, among various reasons.
All sorts of economies may be made by borrowing centrally. It may be asked: if this is the case, why do we not get 100 per cent. of the local authority borrowing arranged in this way, instead of moving up merely to 50 per cent.? The answer is that at this time so sudden a change in procedures would probably produce inconveniences. The movement is in the direction that my hon. Friend the Member for Stoke-on-Trent, Central desires. I can assure him that, speaking for myself and not venturing to predict the future, I would suppose the movement in the end will go further than the 50 per cent. as soon as it can conveniently do so, because all logic seems to be in that direction.
§ Mr. Hordern
The hon. Gentleman is referring to increasing the quotas from 34 per cent. to 50 per cent. for local authorities in respect of the Public Works Loan Board. Can he say when?
§ Mr. Lever
I am not able to say at the moment. In any case, it is not strictly relevant. I have been tempted away from the strict brief. This is an accountancy Bill and it does not matter for the purpose of the Bill whether we lend at 2 per cent. or 22 per cent. to meet the local authorities' requirements through the National Loans Fund. The House is not deciding at what percentage, if any, local authority borrowing shall go through the Fund. It is deciding that there will be this Fund out of which local authorities can borrow if the Government are minded to lend them the money.
I must not trespass too far because, quite apart from trespassing beyond the rules of order, I might trespass even further and beyond the limits of strict discretion. The hon. Member for Walsall, 93 South (Sir H. d'Avigdor-Goldsmid) raised a very appropriate point when he said that the Exchange Equalisation Account has rather an odd effect. When sterling is weak the Government are receiving large quantities of sterling and reducing their borrowing requirements. When sterling is strong the Government are increasing their borrowing requirements. From the point of view of the issue of presenting the accounts and the true Government borrowing and expenditure position, all this is made clear in the paper, As the hon. Member will see when we come to the pro forma. There will he a neat statement which will show how much has gone to the Equalisation Account and how much has come from the Equalisation Account. With that piece of information, I am sure that the problem raised by the hon. Member will be cleared up.
The hon. Member for Cirencester and Tewkesbury (Mr. Ridley) raised a number of problems. He was anxious that we should tailor our offers to the local authorities in accordance with their needs. I shall bear fully in mind all the points that he raised. I think these are questions of debt management and do not relate to the presentation of accounts which is really the main purpose of the Bill. This is not a Bill that pretends to revolutionise our economic management, still less our economic situation. This is a Bill for improving the presentation of our accounts so that he who runs, or does rot run too fast, may read rather better than on the previous occasion. I accept the description of the Bill given by the hon. Member for Horsham, that it is a modest step forward but a useful one. As the hon. Gentleman will discover when we go into Committee and consider detailed matters more closely, it goes a little further than the 1963 White Paper, but that was, perhaps, to be expected from this Government. On the whole, I am grateful to the House for the critical welcome which has been given to this modest step forward.
§ Question put and agreed to.
§ Bill accordingly read a Second time.
§ Bill committed to a Standing Committee pursuant to Standing Order No. 40 (Committal of Bills).